When quantity demanded exceeds quantity supplied, prices go up and the purchasing power of a dollar goes down. When quantity supplied is greater than quantity demanded, prices go down and the purchasing power of a dollar goes up. These changes in price and in the purchasing power of the dollar have many effects on society. Economists study price changes throughout the economy in order to understand these effects.
Price Level
Reflects prices throughout the economy at a particular time
Influences aggregate supply and aggregate demand
Aggregate Supply
Total amound of goods and services produced throughout the economy
Increases when price level increases
Aggregate Demand
Total amount of spending by individuals and businesses throughout the economy
Increases when price level decreases
Inflation
An increase in the average price level of all products in an economy
Occurs when aggregate demand increases faster than aggregate supply
Quantity demanded exceeds quantity supplied --> consumers must compete for limited products --> prices go up --> the amount that a dollar buys decreases
Reduces the real purchasing power of the dollar
Deflation
A decrease in the average price level of all goods and services in an economy
Occurs when aggregate demand decreases faster than aggregate supply
Quantity supplied exceeds quantity demanded --> sellers must lower prices to attract buyers --> prices decrease --> the amount that a dollar buys increases
Examining Price Fluctuations
When quantity demanded exceeds quantity supplied, prices go up and the purchasing power of a dollar goes down. When quantity supplied is greater than quantity demanded, prices go down and the purchasing power of a dollar goes up. These changes in price and in the purchasing power of the dollar have many effects on society. Economists study price changes throughout the economy in order to understand these effects.Price Level
Inflation
Deflation